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A shared dilemma for Beijing and Beltway policymakers

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The Chinese economy is overheating. Beijing is trying to slow growth to sustainable levels and ensure a "soft landing" that will underpin its long-term development plans. But the government's twin fixations on maintaining social stability and hosting a successful Olympics delayed any potential crackdown until after the Games end and the world's attention is elsewhere.

Until recently, that just about summed up the conventional wisdom about China's near-term policy path. And while the chances of the government doing anything to jeopardize its "harmonious society" before or during the Olympics were about as likely as Beijing winning a gold medal for its air quality, what happens after the closing ceremony Aug. 24 is less of a sure thing.

In fact, it's looking increasingly likely that the government's main concern is no longer how to slow the economy. China's top brass instead may be focusing on ways to avoid a shuddering halt.

This may seem hard to believe, given some of the numbers coming out of China. Economic growth slowed in the second quarter to 10.1 percent, but that's hardly evidence of a slump. Iron ore demand, steel output and oil imports all continued to increase at double-digit annual rates. And leaving aside the mass clear-out of migrant workers from Beijing ahead of the Olympics, the country's incredible urbanization rate continues apace 1 million or so people are moving from the countryside to the cities each month. In population terms, that's a city the size of Chicago every quarter.

But underneath the headline numbers there appears to be growing concern among China's leaders about a slowdown. The reasons are familiar. Chinese growth has helped underpin the global boom of the past two decades, so it shouldn't be surprising that China is every bit as vulnerable to the economic slings and arrows that are bombarding consumers and business elsewhere (the theory of "decoupling," which argues that emerging economies are immune to a slowdown in the developed world, doesn't look so smart when oil costs more than $100 a barrel).

There have been three major changes to China's economic position over the past few months, as analysts at BCA Research Inc., Montreal, pointed out in a recent report.

The first, and for Beijing perhaps the most important, concerns its exports. Economists can debate until they are blue in the face about whether China's economy is dependent on exports or just heavily reliant on them. Either way, stuttering demand from Western economies, the slow but steady appreciation of the yuan and China's own efforts to raise interest rates and stem shipments of resource-intensive products like aluminum and steel have hit exporters.

The second is energy prices. The United States isn't the only big oil importer to have felt the pain of recent surging prices China's oil imports as a proportion of its overall import bill rose to almost 12 percent in the spring from around 8 percent at the start of the year. China's predicament is made worse by an unholy mess of price caps and subsidies in its domestic energy markets, which have led to shortages of fuel and electricity.

Lastly, Chinese stock markets have crashed over the past year. Investors smarting from the 20-percent decline in the Dow Jones Industrial Average since October should be thankful they're not in China the Shanghai Stock Exchange fell 53 percent over the same period.

There are growing signs that higher costs and the slowdown in some industries are starting to hit consumers. The impact of the surge in food prices is well publicized; news that unsold automobile inventories rose 50 percent to a four-year high in June suggests that China's middle-class could be feeling the pain as well.

China's rulers, then, are facing a similar dilemma to Washington. Do they focus on fighting inflation, which was running at over 7 percent in June? Or do they instead look to stimulate a slowing economy? The latter course seems more likely for many reasons, chief among them politics. If the U.S. economy stumbles, administrations get voted out of office. China's rulers know that their legitimacy is dependent on raising the standard of living. A "hard landing" for the economy leaves them flat on their face and out of power.

With inflation and energy costs seemingly moderating in the early summer, Beijing may have a little more room to act. Any new growth program is unlikely to lead to another explosion in exports of commodities like steel, as the need to rein in energy costs makes that unfeasible, but the slowdown that many are expecting may be put off for a while.

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